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Private equity has been the focal point of this year’s presidential campaign.
Democrats and the White House have used Republican Mitt Romney’s past private-equity deals to paint the image that Bain Capital helped destroy companies and put Americans out of work.
Still, President Obama is closely aligning himself with supporters who have PE deals in their own closets with less than stellar results for Americans while the investors profited handsomely.
Obama National Campaign Co-Chair Federico Pena led a buyout of a rural telephone company that looks very much like the criticized Romney deals, but has received little attention. Obama last year called former Denver Mayor Pena “one of the finest public servants in Colorado history.”
Pena joined private-equity firm Vestar Capital Partners in 1998, where he is now a senior adviser, after serving as Energy and Transportation secretaries in the Clinton administration.
One of the first deals Pena led for Vestar was supposed to benefit consumers.
Many poorer people living in rural areas of Arkansas, New Mexico, Oklahoma and Texas in 1999 were fed up with incumbent phone provider GTE, which didn’t want to spend the money to improve lines serving 520,000 homes and businesses, according to an account of the deal in this reporter’s book “The Buyout of America: How Private Equity is Destroying Jobs and Killing the American Economy.”
Pena formed a syndicate of 12 well-heeled Hispanic investors to bid in partnership with Vestar and fellow private-equity firms Citicorp Venture Capital and Welsh, Carson, Anderson & Stowe.
The pitch was that the buyers came from the Hispanic community and wanted to improve the lives of its members. The Rev. Jesse Jackson successfully urged GTE to sell the lines to the private-equity investors.
The consortium in 2000 bought what was to become Valor Telecommunications for $1.7 billion, having Valor borrow approximately $1.3 billion in order to fund the purchase.
Debt was not seen as an issue with 25 percent of revenue coming from the Universal Service Fund, that is, from the fees all users pay to ensure that rural telecom operators can offer affordable phone service.
Soon, unforeseen problems arose. MCI WorldCom went bankrupt in 2002. Valor had been receiving roughly 20 percent of its overall revenue from long-distance providers, including MCI, which it charged for access to its network so customers could complete calls.
Around this same time, it also became clear that the company’s phone-service infrastructure needed far more improvement than anticipated. Between 2001 and 2003, Valor had dropped capital expenditures from $108 million to $70 million.
Angry customers rattled off complaints — including static during rain, line noise and service interruptions — to the Texas Public Utility Commission.
Texas approved the buyout on the condition that Valor had to at least maintain GTE’s level of customer service.
In 2002, the Texas PUC concluded that Valor was offering worse service and should stop using its poor financial condition as an excuse. Valor listed its shares to raise money.
In 2006, Windstream Communications bought Valor for $1.4 billion, $300 million less than the price the PE firms had paid for the business six years earlier.
But Pena and the PE firms still earned 1.6 times their money. Most of the profit was locked in, as Valor, at least through 2002, paid the owners a 21 percent annual dividend on $390 million in preferred stock.
Pena did not return calls for comment.